There is much discussion of the recent App Store litigation between Epic, Apple and Google. Apparently divergent results highlight issues with evidence of market power and the need to apply consistent quantitative analysis, rather than to focus solely on contractual restrictions. This note provides an economic commentary on these prominent cases, and provides recommendations for future cases in which contractual restrictions and network effects interact.
The Epic Litigation
In January, the US Supreme Court declined to hear appeals by both Apple and Epic Games (developers of Fortnite) from antitrust decisions of the District Court for the Northern District of California (Epic Games v. Apple Inc., 559 F. Supp. 3d 898 (N.D. Cal. 2021)) and the 9th Circuit Court of Appeals (Epic Games, Inc. v. Apple, Inc., 73 F.4th 785 (9th Cir. 2023)). This denial leaves Apple held to have broken California’s Unfair Competition Law in relation to blocking without excuse a producer’s right to steer business to its own product. These were bench trials.
Apple had delisted Fortnite from its iOS App Store and denied Epic’s paying affiliates access to developer tools after Epic included a link directing its gamers to a payment mechanism outside of Apple’s iOS App Store. The link evaded a maximum 30% commission to Apple for sales of Fortnite and subsequent in-app purchases. Epic sought to lower charges to 12%. In the District Court, Apple claimed that its marketing and technical support justified the difference in fees and pointed to a wide definition of the market to bolster its defense that it was a competitive large firm, not a monopolist. As part of wider accusations of monopolizing behavior, Epic focused on iOS as a specialist market within smartphone operating systems and claimed that Apple’s iOS fees were unnecessarily high.
The District Court was unpersuaded by Epic’s general case in antitrust (dominance, tying and other claims) and declined to reinstate Fortnite onto the App Store outside Apple’s contract terms, taking the view that Epic had breached its contract and made its own trouble. Judge Rogers did temporarily restrain Apple from blocking Epic’s affiliates’ access to developer tools. More significantly, Judge Rogers ruled for Epic on one antitrust claim: that Apple placed harmful anti-steering provisions in its contracts. The District Court permanently enjoined Apple from blocking all iOS developers’ links to payment mechanisms.
Economic analysis
From an economic perspective, the District Court identified many uncertainties concerning market definitions and the impact of market segments like iOS on other operating systems and monetized platforms. Apple successfully claimed it was a competitor in a wide market including many alternative apps available from competitors such as Google and operating systems including Android. Stating a narrow view of the market as a specialist area that Apple had monopolized, Epic then ran into difficulties because its games are functional across platforms:
“[N]ot all games” feature cross-platform functionality, and some platforms have taken steps to limit it. Epic Games, Inc. v. Apple Inc., 559 F. Supp. 3d 898 (N.D. Cal. 2021). But when it comes to the games that do offer such cross-platform functionality, app-transaction platforms (like the App Store and Epic Games Store) “are truly competing against one another.” Id. (Epic Games, Inc. v. Apple, Inc., 73 F.4th 785, 787 (9th Cir. 2023))
Uncertainties over market definition are particularly intrusive in deconstructing modern, network-creating operating systems and highlight the need for much more investigative economic analysis to quantify the nature of these new markets. The Epic cases did not produce significant quantitative analysis of firm-to-firm marginal impacts, which usually require modeling, estimates of demand elasticities, mark-ups on costs and other variables key to traditional regulatory analysis. Detailed contractual arrangements in the new electronic data and gaming industries, as practiced, are also critical in assessing competition. These are significant gaps in analysis, and future cases would benefit from more detail on these critical economic effects.
The 9th Circuit subsequently affirmed the District Court’s enjoining of Apple’s anti-steering provision concerning all iOS developers. The Court of Appeals found no abuse of discretion in granting the permanent injunction and regarded the required protection of all developers as necessary to correct the harm from anti-steering. Thus, the courts required Apple to take Fortnite back at its standard fees with the proviso that Epic and any other iOS developer may add payment links to storefronts. The 9th Circuit stayed the lower court’s mandate pending Apple’s appeal to the US Supreme Court, and so the mandate becomes immediately effective now that the Supreme Court has denied certiorari. Apple’s pricing policy embodied a form of anti-steering considered unacceptable if shown to harm providers and consumers following earlier reasoning in Ohio v. American Express Co. (138 S. Ct. 2274 (2018)).
Consumer welfare impacts
The economics of information and restrictive agreements can be usefully applied to Apple’s delisting of Fortnite and the retaliatory measures targeted at Epic’s affiliates. More information is generally better than less for gamers particularly when the result is lower prices. However, unanswered questions remain:
- Will Epic’s own payment link increase traffic for Fortnite, or just reduce revenue for Apple while increasing benefits for Epic? That is, was there an effect on total output, or just a movement of output?
- Moreover, was the removal part of a wider restriction of competition as Epic claimed, or simply a consequence of contract express terms, as accepted in the District Court?
- Apple claimed, but could it show, that apparently unfair contractual requirements digging into in-app payments can have efficiency purposes, such as incentivizing Apple to do the marketing and keep its Apps and platforms working efficiently?
It seems that it was more Epic’s failure to persuade than contrary proof from Apple that led to the District Court’s decision and the 9th Circuit’s affirmation. Future cases could helpfully examine these and other arguments using detailed economic modeling.
Ancillary restraints
Consistent with an ancillary restraints doctrine, the District Court and Court of Appeals applied a rule-of-reason standard to review Apple and Epic’s disputed agreement, which could be seen as subordinated to a separate transaction (marketing) and as reasonably necessary to achieving that transaction’s pro-competitive purpose (driving consumer benefits). A rule-of-reason approach amounts to a benefit-cost analysis. Epic Games v. Apple Inc., 493 F. Supp. 3d 817, 836 (N.D. Cal. 2020) summarizes the required analysis:
“First, plaintiff must show “diminished consumer choices and increased prices” as “the result of a less competitive market due to either artificial restrains or predatory or exclusionary conduct” by the defendant. Then, “if a plaintiff successfully establishes a prima facie case … by demonstrating anticompetitive effect, then the monopolist may offer a ‘procompetitive justification’ for its conduct.” For example, the monopolist may show “that its conduct is … a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal.” Finally, if defendant offers a non-pretextual procompetitive justification, the burden shifts back to the plaintiff to rebut defendant’s claim or “demonstrate that the anticompetitive harm of the conduct outweighs the procompetitive benefit.” (Quoting U.S. v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001)).
Epic failed to carry its burden of proof on general claims that Apple has a monopoly on mobile gaming and acted as an illegal monopolist by requiring consumers to get apps through its App Store. Its claims of a narrow post-iOS market segment did not help, tending to direct the courts into a contractual analysis of Apple’s fees, given difficulties in resolving market definition. This was a highly strategic decision: Epic gained the prospect of a narrower market in which market power is easier to prove, but the price of this was that wider evidence of market power is harder to use, as it arises chiefly in the wider market whose analysis is thereby truncated. It may prove fruitful for future litigants to move the needle towards the market power analysis.
Nor did Epic convince the courts of the existence of substantially less restrictive alternatives to Apple’s system. Epic prevailed over anti-steering express terms in the standard contract with Apple because there it could show practices giving plausible financial losses. California’s courts will associate such losses with loss of consumer welfare – although it might be noted that there is no necessary or direct link between rival financial loss and harm to consumer welfare. Epic could, as it claimed, lower prices for gamers by working around Apple’s systems. This shows another key strategic aspect of app store litigation: the argument that there is lost competition helps the plaintiff, but it can also be interpreted as the possibility of switching to what remains of that lost competition. The key to this puzzle is to ensure that the quantitative evidence is strong such that even a partial impairment raises concerns – or, alternatively, to show that such effects are absent, however restrictive the clauses may seem.
As in the Epic case, applying rule-of-reason legal analysis often leads to a qualitative benefit-cost analysis – and not a quantitative one. This has significant implications for litigation, not least, that benchmarking can be expanded; ideally, on a quantitative basis. Epic’s failure to persuade the courts, other than over the issue of steering, seemed not to weigh costs and benefits comparing the status quo with feasible alternatives. The courts traditionally resort to broad assessments although they are clearly aware of the economic arguments at stake in antitrust cases. These could be significantly expanded to allow a richer analysis of the wider costs and benefits of competitive restrictions with a sharper focus on consumer welfare impacts. Again, this observation highlights the need for much more economic analysis to quantify the impacts and welfare effects of these new markets.
What’s the difference between a Google and an Apple?
For those inclined to look for logic, consistency and comparability in the law, Epic’s litigation foray has been a salutary experience. In 2023, Epic prevailed in a very similar antitrust case against Google (In re Google Play Store Antitrust Litig., 21-md-02981-JD (N.D. Cal. Mar. 28, 2023)). This jury trial covered similar tying, pricing and exclusionary practice issues as the bench trial with Apple. With Apple, Epic prevailed on just one issue concerning steering. With Google, Epic prevailed on all its allegations of anticompetitive behavior based on market dominance and restrictive practices.
It is hard to find significant differences between the two cases and, while interesting, attempts to do so seem more like rationalization than statements of antitrust principle (https://www.theverge.com/23994174/epic-google-trial-jury-verdict-monopoly-google-play). That is, for all the attention on Google’s particular actions, it is not clear what exactly the difference in market power would be to justify the differential treatment.
Certainly, Google’s apps are used across many operating systems, which might make it more susceptible to antitrust enforcement than Apple’s more sealed iOS. It is also significant that Google’s was a jury trial; Apple’s was bench. Google appears to have run sweetheart deals with some users and to have deleted documents needed at trial. But at the end of the day, both Apple and Google have been found to have restricted competition to some extent. The cases more than anything illustrate the difficulties in unraveling contractual links in the new information industries and a need for much more research, especially on the relationship between contractual restrictions and market power. There is a particular premium on explaining these effects in a jury-friendly way, where relevant.
What’s next for app store analysis?
Finally, this type of case concerning two-sided markets (here, gamers and game developers) is increasingly important as cases spring up in many antitrust tribunals including those in the EU, UK and Australia. In the case of Apple, it will be particularly interesting to see the position taken on the contractual restrictions following the UK CMA’s victory at the Court of Appeal, such that the Mobile Ecosystems case will return. The same issues will also arise as the EU Digital Markets Act takes root.
In all these, and other cases, the relationship between market power and contractual restrictions will be paramount. Litigants will benefit from ensuring that case strategy incorporates economic evidence from the very beginning.
Photo by Christiano Betta